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Global Equity Observer
February 23, 2022

Climate Change: Everyone’s Business

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February 23, 2022

Climate Change: Everyone’s Business

Global Equity Observer

Climate Change: Everyone’s Business

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February 23, 2022


Climate change is everyone’s business. Having engaged on the issue with 95% of the companies in their global strategies, the International Equity Team discusses holding companies to account.


In 2021 we launched a carbon transition engagement programme across our global strategies. Our aim was to assess each holding’s climate risks and opportunities, understand their climate profiles and encourage improvement. We did this to ascertain our portfolios’ resilience to a low-carbon future. We engaged with 95% of all the companies we hold across our global strategies, a level far above the industry average for corporate engagement (according to a recent report by the United Nations-supported Principles for Responsible Investment, which suggests the average level is just 19% of holdings).1

Positive outcomes have followed. Six out of seven companies we own that initially didn’t have targets are now either preparing to set them or have them in place, and nine companies advanced their existing target ambitions to be carbon neutral or net zero. Broadly, at the outset of 2021, an average 54% of our holdings across our global strategies had set net zero targets or better. By the [CE(1] end of the year, this average had risen to 71%. For contrast, according to a report by Oxford University2 covering Forbes 2000 companies globally, only 21% have net zero targets.

Climate change is now everyone’s business. The Intergovernmental Panel on Climate Change Working Group 1’s Physical Science Basis report maintains it is still possible to limit the global temperature rise to 1.5°C, but only if the world acts now.3 In our opinion, tackling climate change is not only the right thing to do; it also makes business sense. Our message to companies we engage with is clear: failure to address carbon emissions is now risky business. Companies face the danger their emissions will be taxed and regulated, and they risk their competitive position, their physical assets, their reputation, their profits, their valuation and maybe even their future.

For investors, evaluating corporate carbon emissions risk is now a fundamental cog in the wheel of security analysis and stock selection. The high quality, company-level information we look for is only available from targeted engagement, not simply from third-party providers. Engagement is the hallmark of our integrated environmental, social and governance (ESG) investment process. We conducted 143 ESG-related engagements overall in 2021. By engagement, we’re not talking box ticking via emails, anonymous group meetings or “speed-dating” conferences. We prefer one-on-one dialogue with management and senior company ESG specialists. Because of our size and long-term holding periods, we have the luxury of excellent access. While there are always going to be one or two outliers that are hard to meet, we are proud to say we met with nearly all our global holdings to exclusively discuss carbon in 2021.

Targeted Engagement to Drive Outcomes

The type of engagement we seek varies, depending on where in the climate maturity matrix an individual company sits. It could be helping kickstart their carbon journey, seeking better transparency and accountability, or challenging well-meant targets that may lack credible pathways. For those already on the right track in terms of their disclosure, targets and actions, we use engagement to both track performance and encourage continued leadership.

The outcomes we’re looking for (or the risks) vary by industry. Following our first carbon-specific meeting with a quality industrial/technology holding that initially had no targets or carbon ambitions, the company invited us to engage with both them and a consultant around our views on best practice and investor expectations. In turn, this will help them formulate their carbon strategy – an outcome, in our view, that demonstrates the effectiveness of targeted engagement.

In a different industry, with a company we hold in consumer credit reporting, we challenged why environmental and social targets were not included in their management incentives. They acknowledged the changing circumstances, telling us that it is now actively being discussed internally. Staying with the theme of changing circumstances, in the context of Scope 1 emissions we asked how they were measuring the CO2 footprint of staff now working from home, and the impact of a likely different working model going forward. We also challenged them on the merits of having data centres located in Texas, given heating and cooling is a significant component of their emissions. Again, they are actively considering their position here.

Engagement isn’t just about challenging policies or targets; we also look to explore climate-related opportunities. Here, positive outcomes may be more distant given some initiatives are relatively recent, but they could well become more significant in time. One of our leading global exchange groups sees regulatory change as positive, with related “new projects popping up everywhere”. In their view, they’re ideally placed to create trading products in regulated markets.

For another of our companies (one of the world’s leading management consultancies), their global partnerships with many of the world’s leading companies, combined with a client base which in some instances is also part of their supply network, puts them in a unique position to advance sustainable initiatives. On the supplier side, as part of the company’s goal to reach net zero by 2025, they aim for 90% of their key suppliers to disclose their environmental targets. On the partnering side, in a joint venture working with the world’s leading software company, the company is helping U.K. utility and energy companies transform the energy system and lower the cost of decarbonising the supply and demand of electricity in the U.K. This is underpinned by open data, artificial intelligence and equipping a workforce with digital skills. In our engagement with them, we pressed them on why environmental targets were not included in management incentives, while diversity and inclusion were. They have taken our suggestion on board for internal discussion.

The Programme Ahead

Having completed the first phase of our programme, our plan for 2022 is to continue to advocate for better outcomes in four focus areas: (i) improved transparency and disclosure; (ii) the strengthening of targets to net zero and the adoption of science-based targets and Scope 3, where missing; (iii) better alignment of management incentives, pressing for environmental and social targets to be tied to executive compensation in order to drive their fulfilment; and (iv) moving the conversation onto nature-based solutions and physical asset risk.

Climate change is not something that can be tackled by an individual or small group, no matter how determined or engaged they are. But what we can do is continue to hold our companies to account, pushing for and encouraging change.

What never changes is our relentless focus on owning high quality compounders at reasonable valuations. Time and again over the last 25 years, investing in companies with these characteristics has proven valuable during truly testing times, from the dot-com boom and bust at the beginning of the century, to economic recessions and, most recently, the global pandemic. Their relative resilience has shown through when it has been needed most. The strong underlying economics we prize the steady compounding of profits over time at high returns on operating capital are the high quality fundamentals that we continue to believe will help set the best course for attractive returns in the long term.

Managing Director
International Equity Team
Head of ESG Research
International Equity Team
Executive Director

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Scope 1 emissions are a company’s own direct emissions (e.g., coal/gas power plant, cement kiln, steel furnace, its own trucks).

Scope 2 are emissions embedded in an organisation’s electricity purchases. They depend on a) how energy intensive the factory/production is and b) its electricity provider’s energy mix, whether renewables or fossil fuels. This is now a matter of choice in many countries.

Scope 3 (indirect emissions) relates to the supply chain (upstream) and customers’ logistics and product use emissions (downstream).

1. Source: Principles for Responsible Investment, Listed equity snapshot 2017-2020, 8 October 2020.

2. Source: ECIU Oxford University – Taking Stock. A Global Assessment of Net Zero Targets. March 2021

3. Source: Intergovernmental Panel on Climate Change (IPCC) Working Group I and United Nations Secretary-General’s statement on the IPCC Working Group 1 Report on the Physical Sciences Basis of the Sixth Assessment, 9 August 2021.

Risk Considerations

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small- and mid-capitalisation companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with  investments in foreign developed markets. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.


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